Sweet 16 Update - March 2

[dan_s]

During the week that ended March 1 the Sweet 16 gained 4.81% and it is now up 5.58% YTD.
The S&P 500 Index gained exactly 1% during the week and is now up 7.38% YTD. A few tech stocks, that are trading at extremely high valuations (in my opinion) are the primary reason.

Investors are gaining more confidence in the oil price as we move into March. U.S. refinery utilization needs to ramp up to 95% of capacity to meet the demand for transportation fuels, which are all below normal inventory levels today.

All 16 have announced Q4 results and I have updated all of the forecast/valuation models.

Baytex Energy (BTE) is the only company that reported a Q4 loss, due to large non-cash impairment charges for assets acquired long ago. Q4 production and their operating cash flow and free cash flow were inline with my forecast.

As you know by now, we have a few members that focus on the negative issues that come up each quarter. After BTE sold off a bit on Thursday, it bounced back on Friday. Looking forward, Baytex has some outstanding running room in South Texas that was acquired in the Ranger Oil acquisition that closed on June 20, 2023. The Company is focused on developing those Texas assets and they should generate over $600 million of free cash flow from operations this year. In this business, don't waste your time looking in the rearview mirror. Even the best companies have to write off some assets from time to time.

BTE is down 2.71% YTD and trades at a 92% discount to my updated valuation. It is free cash flow positive, pays a dividend and has an active stock buyback underway.

Diamondback Energy (FANG) leads the pack, up 19.4% YTD. Permian Resources (PR) is gaining ground, up 18.01% YTD. Of these two, PR has more upside potential. They reported outstanding Q4 results and they hold a lot of high-quality Running Room in the Delaware Basin.

I am surprised that EOG Resources (EOG) is still trailing the pack, down 10.36% YTD. EOG does trade at a relatively high multiple of CFPS (5.66X), which compares to the Sweet 16 valuation multiple average of 3.66X. However, size does matter in this business and EOG holds extremely valuable assets and has decades of Running Room. It also pays a nice dividend. It is a "Core Holding" quality company.

Prior to the False Paradigm of "Peak Demand" for oil was spread, companies of this quality traded at multiples of 6X to 10X operating cash flow. Today, some of these companies are trading below PV10 NAV of just their P1 reserves. CPG, SBOW, TALO and VTLE still trade below book value.

SilverBow Resources (SBOW) and Vital Energy (VTLE) trade at the largest discounts to my valuation. They both reported strong Q4 results and they seem to be getting more attention. Vital's up 11.69% YTD and still trades at less than half of my valuation. They don't pay dividends, which does keep some investors away.

Ovintiv (OVV) and SM Energy (SM) are now both up more than 14% YTD. They are large mid-caps that deserve more attention.

Range Resources (RRC) is the only company trading above my valuation, which is a surprise since it is a "gasser".

I have updated my forecast model for all of the companies in our three model portfolios that have announced Q4 results. You can download them from the EPG website.

[Fraser921]

Most absurd phrase ever, imho > "non-cash impairment charges"

]The reason it's non cash now is because the cash has already been spent.

Baytex took a "non-cash impairment charges" and the name fell 9.3 % over 2 days. Impairments do matter and Baytex has a history of doing them.

Worse, some analyst's ignore cap ex in their valuation analysis in determining unrealistic Target prices. Just think happy thoughts..don't worry be happy!

I'm sorry if this comment triggers the perma bulls who just want happy thoughts!

Baytex has a history of non cash impairments. In last 5 years 3.7 BILLION IN IMPAIRMENTS WERE TAKEN! Baytex is making non cash impairments a routine thing.

2023 -$834m
2020 -2.4b
2019 -188m
2018 -285m
2016 -$423m
2015 -$1.1b
2014 -$450m

https://x.com/Kevin_AGraham/status/1763403408780747194?s=20

Eric Nuttall reaction to his 10 % haircut in Baytex

https://x.com/PetroGirl1/status/1763290855069090180?s=20

[ChuckGeb]

It’s really a shame that they can’t just write off the debt associated with the non cash charge arising from cash spent a long time ago. Unfortunately that debt must be paid back at substantial current interest rate from future free cash flow. Just saying.

[dan_s]

All of my current valuations are based on the future, not mistakes made in the past.

The current valuations are based on operating cash flow of 1X the prior year CFPS + 2X current year CFPS and 1X next year's CFPS, divided by 4 and then multiplied by what I believe is an appropriate valuation multiple. Quality of each company's "Running Room" us the key.

Capital expenditures are spent to develop future operating cash flow.

FYI BTE has a new CEO that has shifted their focus to South Texas.

[dan_s]

From HFI Research this morning

In today's article, I will be talking about exploration and production or E&P stock valuation. I will not be talking about offshore, oilfield servicing, pipeline, integrated majors, or refineries, just E&Ps. Hopefully, through this write-up, you will also gain a better understanding of how to evaluate E&Ps.

What is intrinsic value?
Investing is hard because it is both science and art. While some academics have attempted to put intrinsic value in a simple-to-understand formula, any real business owner understands that the real intrinsic value of a business is much harder to calculate.

The basics, as everyone knows, is that an investment should be valued at the net present value of all future free cash flows. The trick is, of course, 1) figuring out what those free cash flows are, 2) what discount rates to use, and 3) whether or not you are even remotely correct on 1 and 2.

But alas, we all venture on to tackle these two seemingly impossible tasks regardless, because after all, what else would we do with our time?

E&P 101
One very simple way to think about E&P valuation is to think of it as buying underground hydrocarbon inventory. Whether it's oil, natural gas liquids, or natural gas, an investor is, in essence, buying inventory.

Now with each passing second, the E&P is bringing that hydrocarbon inventory to the surface, and the investor is occurring both the associated cost to extract that inventory and the revenue associated with it.

And it's every E&P's job to try and increase this "inventory" every year with its capital spending. Whether it's doing it by enhanced oil recovery methods (polymer, waterfloods), buying land, buying competitors (proved reserves), or whatever is the case, it's important to expand the inventory. Because without expansion, this company is a "melting ice cube."